Why You Should Pay for College Without Financial Aid

With many colleges requiring deposits from prospective freshman students on May 1, the clock for families still unsure about which college to choose is ticking.

For many, the choices will break down like this: The fancy, brand-name, $40,000-per-year private college vs. an in-state public college that costs about a third of that amount.

Fortunately, financial aid is here to help. Lynn O'Shaughnessy at CBS MoneyWatch reports that "the average private institution is slashing its college tuition by 53.5%. So a school with a tuition sticker price of $30,000 would actually cost $13,950.... More than 82% of students attending private colleges and universities are capturing tuition discounts via scholarships and grants from their institutions."

Sounds great, right? After all, if scholarships and grants slash a private college's tuition from $30,000 to $13,950, that makes it pretty comparable to a public college in terms of costs -- right?

Well, sort of. But here's the problem: While financial aid is a wonderful thing, it's much easier to come up with $15,000 for a school where you aren't receiving financial aid than at a school that costs $15,000 after receiving $20,000 in assistance. Here's why:

If you pay for college with institutional grant money, third-party scholarships won't necessarily help make up the difference.

A lot of parents look at college and say, "Well, if we get $20,000 in grant aid from the school and then another $2,000 in scholarships, we'll only have to come up with another $13,000 to meet the $35,000 sticker price -- right?" Wrong.

Unfortunately, third-party scholarships generally detract from the financial aid you'd receive -- if you have $20,000 in grants and an expected family contribution of $15,000, $2,000 in private scholarships will reduce your financial aid eligibility -- not your expected contribution.

Some schools will work with families to reduce loans before cutting into grant aid, and some will work out a 50/50 split of one kind or another -- but many will simply take your scholarship money without so much as a thank you. For example, the University of Oregon notes on its website: "If UO has met 100% of your demonstrated need and subsequently you receive an outside scholarship, one or more of your financial aid sources may need to be adjusted. Loan assistance is adjusted first, wherever possible."

If you receive a lot of grants, it can be hard to make up the difference by increasing your child's earnings or your own.

Eric Cramer, a Charles Schwab financial consultant told The New York Times that for a family of four with one family member in college and a household income of $75,000, a $10,000 bump in earnings will reduce financial aid eligibility by $3,2000 -- and that's pre-tax. This means to come up with an extra $10,000 to pay for college, you very well might have to put in around $20,000 worth of work -- once you factor in the diminished financial aid you'll receive.

The same problem applies to selling stock that has appreciated or any other means of raising cash that increases your income. And, as the Times pointed out, doing a traditional-to-Roth IRA conversion will mess up your financial aid eligibility big time.

What about having your kid work to help pay for college? Student can earn up to $3,000 per year before it impacts financial aid eligibility. Any earnings on top of that reduce financial aid eligibility by 50 cents for every dollar earned. Ouch!

Financial aid can change from year to year

Many colleges award financial aid using the crack-dealer method: A lot of grants in freshman year to get the student hooked, and then an abrupt shift in favor of loans in the following three years, knowing that the student is already committed to that school. Worse, relying on financial aid to pay for college requires families to monitor their financial patterns closely for four years.

None of this is to say that you shouldn't apply for financial aid. Everyone should fill out the Free Application for Federal Student Aid (FAFSA) form and see what happens.

But if your college choice comes down to little or no financial aid at a school with a low sticker price vs. a ton of financial aid to bring down the cost of an expensive school, opting for the low sticker price has significant financial advantages.

Not all $15,000 net costs are created equal. Paying for college without financial aid is always a better option.